Filing Bankruptcy

11 Replies

A new Tenant had moved in to my rental, once the Lease was signed they had said. "BTW did I mention I'm filing Bankruptcy next month?" Is this going to effect the rent rate there paying now? Are they going to pay rent at all? What should I do in this situation?

@Kent Harris Did you run a credit check prior to signing the lease?  Bankruptcy usually doesn't spring up suddenly.  Did the tenant's credit report show a lot of recent late payments and/or indicate that the tenant was over extended?

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Yes I do a credit check. There was nothing there that was a huge flag or anything. I told them that they should just settle with there creditors and that Bankruptcy was not going to solve there problems. High risk people I get a double deposit. One couple I had pay 6 months advance rent. Typically I will file an eviction notice after the 6th of the month. Not sure if a Bankruptcy is going to effect there ability to pay since they make enough money to pay the rent and have a stable job.

Usually if they are carrying a bunch of debt then they will go chapter 7 to wipe it out.

Sometimes it's better to have tenants after a recent chapter 7 because they have a clean slate and it takes awhile for anyone to give them new credit again. That means they cannot load up on high debt fast and generally have the money left over to pay you the rent.

If they are doing a chapter 13 the repayment plans are generally 3 to 5 years. 90 plus percent never finish the plan to a discharge. It gets dismissed at some point for non-payment or non-compliance and then all the late fees and balances tack back on again so they haven't gotten anywhere. Their credit is frozen in the crapper during a chapter 13. The 2008 BK reform laws have made it very tough on BK filers now so it might not be as easy as they think.

BK attorneys generally provide a free consult to advise if it makes a wise decision or not. 

Bankruptcy attorney here-

After they file bankruptcy, they are going to have less debt, often the same assets and income and they can not file Chapter 7 Bankruptcy for 8 more years. Most of my clients are more stable and have higher credit scores after filing bankruptcy. Personally, I would love to have recently filed debtors as tenants.

There are always exceptions and fact dependent rules. In general- bankruptcy doesn't have the ability to change the terms of your lease. It can cancel it. If they stop paying AFTER they notify you of the actual bankruptcy filing, do not try to collect on them personally. This means you get a case number or a letter from the Court. You should contact your legal counsel to decide how to move forward. Bankruptcy does not allow them to keep your unit but there are special rules if they stop paying and do not intend to assume the lease. 

Out of curiosity- I have not had any of my clients "hurt" a landlord after bankruptcy beyond breaking a lease early. Has anyone had a different experience? 

Paul,

I've only been in a Real Estate investor since September of 2014 and don't know much about Bankruptcy. Since that time I have purchased 8 rental properties which 7 are occupied and 1 under renovation. I told the Tenant about a company that specializes in cleaning up bad credit and a lot of times they could do a settlement with the company they owe to. About 8 years ago instead of filing bankruptcy I thought it was better to settle with the creditors and made 20 or so settlements. The settlements were on my credit report for about 2 years and my credit shot up into the high 700s in about 2 years. I told the tenant that was probably there best option. The fact of the matter is they decided not to sign up with automatic debit which is a clear sign that they want to file.

@Paul Choate Couldn't the tenants include a debt after they've filed?  I'm just wondering if they get evicted for nonpayment, then they add the debt to the LL to their BK filing?

And I thought I'd read somewhere, that if their past-due rent is included in their BK that they can get a court to delay eviction?

Sue, They have not filed yet. That is the problem, as soon as the lease was signed they told me they were filing for Bankruptcy. If it was after Bankruptcy there would not be a problem since there about to file there is a possibility they could include the lease in the Bankrupcy. 

@Sue K. I know this is not much of a comfort, but the gains of wiping out a few months of rent in a bankruptcy are probably not worth the effort of moving. Obviously, you will not be giving them a good reference!

@Kent Harris   @Paul Choate Yeah, I think it's really sketchy that the tenants would even mention their bankruptcy after the fact.  Oh well, Kent, I guess live and learn.  Whatever was "iffy" on their credit report, remember that that is not okay next time around.  Whatever you decided was good enough as far as bad credit goes - was obviously not good enough.

There is no such thing as a surprise bankruptcy, Kent.  Their credit report was bad enough that they had to file.  So, you better readjust your idea of what's acceptable criteria.  These guys may be able to "take" you for a couple months rent.  Hope I'm wrong.